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- Section IV
Need for Integration
- 11
The Need to Integrate
Expected Outcomes
After reading this chapter, you should be able to
• Identify the reasons to integrate supply chains
• Describe the differences between mass production and mass customization
• Explain why there is a need to move from vertical integration to virtual integration
• Describe how organizations are moving toward more diverse cultures
• Discuss the use of the triple bottom line to facilitate supply chain integration
• Identify the drivers of change for integrating supply chains
• Describe the steps needed to integrate supply chains
• Discuss why developing relationships and trust is needed to integrate the supply
chain
• Justify the use of strategic planning when integrating the supply chain
• Explain why integrating supply chains requires a project management approach
Company Profile: Cisco
In the earlier chapters of this book, we have described the separate functions along the
supply chain. In the remaining chapters, we will describe the need to combine the separate
functions into an integrated supply chain. Chapter 11 outlines the need to change because
most organizations will have to change their internal operations as well as their relation-
ships with customers and suppliers. Change is often difficult. In addition to changes in
individual organizations, changes will also be required in communities and entire coun-
tries. Short-term fixes will have to give way to long-term program planning. As you read
this company profile and the chapter in the book, think about these questions:
• Why is change difficult? Do you like change? Why or why not?
• Why is mass customization important to consumers? To suppliers?
• Why is it difficult for state or federal governments in the United States to change?
• How should companies organize to facilitate supply chain integration?
What additional questions do you think relate to the need for supply chain integration?
361
- 362 Principles of Supply Chain Management
Company Profile: Cisco
Chapter 10 is about the need to tightly integrate the participants in a supply chain. As
outsourcing has moved to disconnect the supply chain, many companies have had to
work harder to maintain a steady flow of products, especially those companies with
rapidly changing products and whose customers and suppliers are scattered through-
out the world. Cisco is such a company.
HISTORY OF COMPANY
Cisco Systems was started in 1984 by two members of the Stanford University computer
support staff: Leonard Bosack and Sandy Lerner. They were joined by Kirk Lougheed,
also at Stanford University; Greg Satz, a programmer; and Richard Troiano, who handled
sales, as the early Cisco team. The company went public in 1990 on the NASDAQ Stock
Exchange and, through internal growth and acquisitions, continued to grow through
the early 1990s. The rapid growth of the Internet during the late 1990s fueled the phe-
nomenal growth of Cisco until the economic downturn at the beginning of the new mil-
lennium (Cisco 25th Anniversary Time Line). Additional information about the history
of the company can be found at http://www.youtube.com/watch?v=W9SWUYHgBaU.
In the mid-1990s, Cisco was primarily a router and switch vendor. Over time, Cisco
moved from making gear for data networks to providing equipment for voice commu-
nications and video systems and has become more focused on providing software to
support its hardware (Waltner 2009).
Figure 11.1 shows the net sales since the company went public in 1987. Sales come pri-
marily from products in the early years; however, in recent years, services have become
Cisco product and services sales
50,000
45,000
Total net sales Product sales Service sales
40,000
35,000
Dollars in millions
30,000
25,000
20,000
15,000
10,000
5,000
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Years ending July 31
FIGURE 11.1
Cisco sales. (Graph prepared with data from Mergent Online, http://www.mergentonline.com, accessed
September 12, 2013.)
- The Need to Integrate 363
a larger part of their sales. Even in the down years of 2002, 2003, and 2009 for products,
services sales continued to increase.
They also recognized that to sustain their rapid growth, they would have to out-
source much of their manufacturing. This gave them more flexibility and reduced the
investment required to set up their own manufacturing facilities. They turned to con-
tract manufacturers, as did other large electronic companies, such as Sony and Apple.
While it has proven to be a viable strategy for rapid growth, it has not been without
some disruptions along the way.
In the third quarter of 2001, after a dramatic decline in sales resulting from an eco-
nomic downturn, Cisco was forced to incur a $2.25 billion write-down in excess inven-
tory. The company had been overly optimistic about continued increases in sales and,
in order to assure the supply of critical components, had guaranteed their purchases to
suppliers. When sales declined, they were committed to accepting components from
suppliers; unfortunately, they were not able to realize full value of this inventory in
subsequent products because of the rapid change in product designs (Barrett 2001). The
only other downturn in sales was in 2009, when the economic slowdown in the United
States was a major factor in the reversal of continuing sales increases. Although net
income declined from 2008, the company remained profitable.
MARKETS
Cisco sells products throughout the world, as shown in Table 11.1. While over half their
sales are in the Americas, they are aggressively extending their scope, especially in
emerging markets.
In his letter to shareholders, Cisco CEO John Chambers said, “We believe that our
long-term strategy, which is focused on delivering intelligent networks and technology
and business architectures built on integrated products, services, and software plat-
forms, is the right one to help our customers achieve their top priorities and fuel our
success over the long run” (Cisco Annual Report 2012, Letter to Shareholders).
PRODUCTS
The Company designs, manufactures, and sells Internet Protocol (“IP”)–based
networking and other products related to the communications and IT industry and
provides services associated with these products and their use. These products, pri-
marily integrated by Cisco IOS Software, link geographically dispersed local-area
TABLE 11.1
Cisco Markets
Sales and Gross Margin for 2012 (Millions of Dollars)
Americas EMEA APJC Total
Net sales ($) 26,501 12,075 7,485 46,061
Sales (total %) 58 26 16 100
Gross margin ($) 16,639 7,605 4,519 28,763
Gross margin (%) 63 63 60 62
Source: Cisco Annual Report, 2012, p. 129, http://www.cisco.com/web/about/ac49/ac20/about_cisco_
annual_reports.html, accessed September 2012.
Note: Americas—United States, Canada, Latin America; EMEA—Europe, United Kingdom, Ireland, Africa,
Russia; APJC—Asia Pacific, Japan, China.
- 364 Principles of Supply Chain Management
TABLE 11.2
2012 Net Sales by Product Groups
Millions of Dollars Total (%)
Switching $14,531 32
NGN routing 8,425 18
Collaboration 4,139 9
Service provider video 3,858 8
Wireless 1,699 4
Security 1,349 3
Data center 1,298 3
Others 1,027 2
Total product 36,326 79
Service 9,735 21
Total sales $46,061 100
Source: Cisco Annual Report, 2012, p. 130, http://www.cisco.com/web/about/
ac49/ac20/about_cisco_annual_reports.html, accessed September 2012.
networks (“LANs”), metropolitan-area networks (“MANs”), and wide-area networks
(“WANs”) (Cisco Annual Report 2012, p. 130).
One recent example of Cisco’s integrated products is the network infrastructure
provided for the London 2012 Olympic Games. Cisco partnered with the British
Government, the London Organizing Committee of the Olympic and Paralympic
Games, British Telecom, and broadcasters such as NBC. Cisco’s system enabled 1,800
Wi-Fi hot spots and 80,000 data connections with a capacity of four times larger than
any previous Olympic Games. Cisco technology helped connect 10 million spectators,
76,000 volunteers, and 22,000 athletics and coaches.
Cisco also believes they are uniquely positioned in the market transition currently
underway toward more programmable, flexible, and virtual networks. Their focus on
five core businesses is as follows: routing, switching, and services; data center (virtual-
ization/cloud); collaboration; and video/and architectures for business transformation
(Cisco Annual Report 2012, Letter to Shareholders).
Table 11.2 shows the breakdown of net sales by product category.
Although switching and routing continue to be the prime sources of revenue, other
product groups are growing, especially in the security and data center areas.
SUPPLY CHAIN STRUCTURE
Cisco has extended supply chains because it outsources much of the manufacturing
of their products. One report indicates Cisco has more than 1,000 suppliers, 4 contract
manufacturers, and 50,000 purchased parts. It also outsources assembly of its finished
products (Preparing for Pandemics 2011). In their 2012 Annual Report, Cisco states they
“rely on contract manufacturers for all of our manufacturing needs.” “Our arrange-
ments with contract manufacturers generally provide for quality, cost, and delivery
requirements, as well as manufacturing process terms, such as continuity of supply;
inventory management; flexibility regarding capacity, quality, and cost management;
oversight of manufacturing; and conditions for use of our intellectual property. We
have not entered into any significant long-term contracts with any manufacturing
service provider” (p. 13). This understanding shows Cisco has very tightly linked
themselves with their contract manufacturers.
- The Need to Integrate 365
Cisco has a continuing need to integrate acquired companies into the supply chain
network. Many acquired companies have supply chains that may, or may not, readily
mesh with those established within Cisco. To illustrate their activity in this area, Cisco
made seven acquisitions during 2012, most in related lines of business.
RISK MANAGEMENT
As a result of its extensive and complex supply chains, the company started a formal
risk management program in 2007. The risk management team identifies current and
future potential risks in the supply chain and develops plans and strategies if potential
risks develop into full-fledged crises.
Despite the efforts to improve their risk management program, Chad Berndtson
(2010) reported that several prime customers of Cisco reported that delays and par-
tial shipments of products had adversely affected their business. This was during the
period following the business downturn in 2009. Even so, most customers recognized
the difficult circumstances Cisco was operating under and acknowledged that Cisco
representatives worked closely with them during this period.
One of their most challenging tests was the 2011 earthquake and tsunami in Japan.
James Steele, program director for Cisco, reports the following sequence of events fol-
lowing the earthquake:
• The earthquake occurred on a Thursday (West Coast time), and by Friday morn-
ing, “we had a war room set up, and identified all the people that needed to be
involved. By noon we had an accounting of all our major suppliers within Japan,
at least all the tier ones. Within 15 hours of the quake, we had a good understand-
ing as to which suppliers were impacted. There were about 160” (Carbone 2011).
• The risk management team determined that suppliers within a 100-mile radius
of the Fukushima plant would be impacted by the disaster, as a result of direct
damage, power outages, evacuations, and employees not able to get to work.
• Within 2 days, the team knew which suppliers were up and running and which
had been damaged or shut down. They knew which parts required mitigation
to avoid shutdowns of the Cisco supply chain.
• In some cases, Cisco had second sources (previously determined prior to the
earthquake) who could supply parts. In other cases, Cisco made spot buys
from authorized distributors, independent distributors, and parts brokers.
• As a result, Cisco did not suffer any serious disruption of their operations.
A spokesperson of Cisco credits the minimal disruption to operations to the
planning that had been done in anticipation of a catastrophic event such as the
earthquake (Carbone 2011).
Steele stated there are more risks in the supply chain than there were in the past.
“Generally, the world has become more of a risky place. I think we’re hitting an inflec-
tion point right now with world economics, political unrest, the recent debt crisis and
the U.S.-China relationship. Things are much more intertwined from a financial stand-
point within the world financial system. There’s a lot more interdependence now just
in general. Such interdependence means more risk for everyone in the supply chain”
(Carbone 2011).
Cisco’s submission for the Institute of Supply Management (ISM) 2012 Award for
Excellence in Supply Management described how the company’s approach to risk man-
agement is centered in its customer value chain management (CVCM) organization,
- 366 Principles of Supply Chain Management
which is responsible for the planning, design, manufacture, delivery, and quality
of the company’s products and solutions. The program includes the following four
key processes:
• Product resiliency: Process for engaging with Cisco Engineering and product
operations to identify risk trade-offs in the early design and development
phases of Cisco products
• Supply chain resiliency: Process for working with CVCM’s global supplier man-
agement (GSM) and global manufacturing operations (GMO) functions to
assess and improve resiliency across Cisco’s supply base, manufacturing, and
test equipment partners
• Business continuity planning (BCP): Semiannual process to engage all critical
supply chain partners in providing Cisco with over 36 resiliency data points
such as emergency contact information, availability of alternate power sup-
plies, and estimated time to recover (TTR)
• Supply chain incident management: Process for monitoring worldwide events
on a 24/7 basis, identifying and escalating any incident of concern, assessing
impact, and organizing a cross-functional response team to mitigate the risk
to resolution (O’Connor et al. 2012)
After their experiences in 2001, they were better prepared to deal with the economic
downturn in 2009 and the earthquake in 2011.
CONCLUSION
Cisco is a company that has shown the ability to adapt to changing conditions. It has
grown rapidly in less than 30 years to become one of the premier companies in the world
and a recognized leader in their industry. Although they have experienced setbacks,
they have learned from those experiences and taken steps to be able to deal with future
negative events, whether from economic downturns or from physical catastrophes. Ken
Pesti, a technology consultant, thinks that Cisco will continue to face complex technolog-
ical, logistical, and competitive issues. However, he has confidence in the company. As he
puts it, “People have bet against Cisco before, and they have been wrong” (Walther 2009).
REFERENCES
Barrett, L., Cisco’s $2.25 billion mea culpa, CNET News, 2001, http://news.cnet.com/2100-1033-
257278.html, accessed February 1, 2010.
Berndtson, C., Cisco response to supply chain woes lacking, say partners, CRN, May 11, 2010,
www.crn.com/224701527/printablearticle.htm.
Carbone, J., Cisco strives to identify and mitigate risk in its supply chain, Digi-Key Corporation,
Thief River Falls, MN, October 8, 2011, www.digikey.com/supply-chain-hq/us/en/
articles/buying-conditions/cisco-strives-to-identify-and-mitigate-risk-in-its-supply-
chain, accessed September 5, 2013.
Cisco Annual Report, 2012, http://www.cisco.com/web/about/ac49/ac20/about_cisco_
annual_reports.html, accessed September 2012.
Cisco 25th anniversary time line, http://www.youtube.com/watch?v=W9SWUYHgBaU,
accessed August 7, 2013.
Mergent Online, Cisco Systems, http://www.mergentonline.com, accessed September 12, 2013.
O’Connor, J., Steele, J.B., and Scott, K., Supply chain risk management at Cisco: Embedding end-
to-end resiliency into the supply chain, 2012, http://www.ism.ws/files/RichterAwards/
CiscoSubmissionSupportDoc2012.pdf.
- The Need to Integrate 367
Preparing for Pandemics: How Cisco immunized its operations, The educated executive, October
27, 2011, www.educated-exec.com/news/2011/10/preparing-for-pandemics-how-cisco-
immunized.
Waltner, C., Cisco’s silver anniversary: A history of reinvention, December 10, 2009, http://
newsroom.cisco.com/dlls/2009/ts_121009.html, accessed September 9, 2013.
Introduction*
Increased competition is forcing businesses to consider how best to gain a competitive advan-
tage or at least to hold their own against global competitors. As a result, effective supply
chain management (SCM) is becoming increasingly important. Today’s supply chains are
comprised of selected customers and suppliers who build lean and agile supply networks.
The benefits of successful supply chains are direct and measurable—lower product
costs, reduced inventories, higher-quality products, faster response times, fewer stockouts,
and higher on-time deliveries. Other benefits that are more difficult to measure and verify
include increased market share, improved customer satisfaction, and increased customer
retention. In speaking of global strategies, Edward Davis and Robert Spekman suggest,
“the extended enterprise is really about -creating a defensible long-term competitive posi-
tion through strong supply chain integration, collaborative behaviors, and the deployment
of enabling information technology” (Davis and Spekman 2004).
Before we begin our discussion, we would like to draw your attention to one of the most
comprehensive descriptions of how a company can build a supply chain. In his book, Supply
Chain Architecture: A Blueprint for Networking the Flow of Material, Information, and Cash,
William T. Walker calls on his 30+ years of experience with Hewlett-Packard and its spin-
off, Agilent Technologies, to provide the reader with a detailed description of the individual
components and how they fit together to form a world-class supply chain (Walker 2005).
Manufacturing, or the production of tangible goods, has changed substantially over
the past 50 years and continues to change. Some of the most notable changes include the
following:
• Product design has moved from a what can we make? attitude to a what does the cus-
tomer want? attitude. As a result, there is increased collaboration between market-
ing and manufacturing in the product design and development process.
• Products are moving from a standard one size fits all focus to one that can be
customized to fit individual customer wants and needs. Manufacturing is moving
from a mass production mode to a mass customization mode. In some cases, cus-
tomizing is completed downstream from the primary manufacturing company at
the wholesaler or retailer level.
• Manufacturers have moved from being vertically integrated, where they produce
the component parts and then assemble them, into being assemblers with inde-
pendent suppliers providing the component parts.
• Some manufacturers have moved even further to outsource more of their former
internal functions to outside suppliers. Increasingly, these outside suppliers are in
foreign countries where lower labor rates have become a major source of cost savings.
* A major portion of this section is adapted from Crandall and Crandall (2014).
- 368 Principles of Supply Chain Management
• Some manufacturers have gone to the ultimate in outsourcing by having contract
manufacturers do the entire manufacturing function. In this case, the company
that was once a manufacturer is now a shell manufacturer, that is, a manufacturer
in name only.
• While certain manufacturing activities have been removed from the traditional
manufacturer’s role, a number of service activities have been added. It is essential
that today’s manufacturers have services to accompany their product if they are
to be successful.
• The focus that was once primarily on low cost and efficiency now includes flexibil-
ity and responsiveness as manufacturers try to be more attuned to their customers.
• The net effect of these changes is manufacturers have become more concerned
with the management of widespread operations that have become more com-
plex with the addition of product variety, customization, faster response times,
higher-quality demands, and larger and more demanding customers, especially
at the retail level.
As the future unfolds, more changes can be expected.
Setting the Stage*
Many managers are finding their supply chain is not operating as they expected—the real-
ity is far different from the dream. What did they expect? Apparently, SCM is more than
finding a few good vendors who will deliver the right product at the right time in the right
quantity and with good quality.
What about demand? Is the customer part of the supply chain? In case there is any
doubt, another definition clears up that point. The lean supply chain is “a set of organiza-
tions directly linked by upstream and downstream flows of products, services, finances
and information that collaboratively work to reduce cost and waste by efficiently and effec-
tively pulling what is needed to meet the needs of the individual customer” (Manrodt
et al. 2005). The bottom line is that the customer is an integral part of the supply chain.
Does the supply chain have to be lean, too? Ideally, it should and according to some
authorities, the supply chain should be agile, adaptable, and aligned (Lee 2004). It should
also be integrated, innovative, and globally optimized, involve interorganizational collab-
orative relationships, and share the benefits equitably among the supply chain members
(Heckman et al. 2003). SCM is a strategic, cooperation-oriented, business process manage-
ment concept, cutting across organizational boundaries (i.e., integration oriented), which
leads to increased results for all supply chain members. SCM demands integration and
cooperation beyond the logistics dimension. SCM processes are customer and/or end user
driven (Kotzab and Otto 2004).
Should the company have an integrated supply chain organization with a C-level execu-
tive in charge, much as materials managers presided over the flow of materials? Some
believe they should, although one study found that only about 25% of the companies stud-
ied had a single executive in charge of the total global supply chain, while a third of the
* A major portion of this section is adapted from Crandall (2005).
- The Need to Integrate 369
companies did not even list a supply chain officer on their website. While the absence of
an executive in charge does not indicate the company did not have an integrated supply
chain, it poses doubts (Gilmore 2008).
Reasons to Integrate
Do all companies have world-class supply chains? Not unless they are among the handful
of companies that are continuously cited in the literature as having the best supply chains
(Apple, Procter and Gamble, and Wal-Mart, to name a few). However, for many companies,
effective supply chain implementation has been difficult to achieve. Research on supply
chain implementation has revealed the following:
• An extensive review of the literature spawned the conclusion that while integra-
tion is beneficial, it is also difficult. Adopting a supply chain perspective requires
trading partners to think and act strategically. This is difficult within a single
organization; it is even more difficult across a diverse and dispersed group of
trading partners (Power 2005).
• A working paper from Michigan State University, a leading SCM school, made a
distinction between today’s supply chain and tomorrow’s supply chain. They con-
sidered today’s supply chain to be relatively simple, unidimensional, and focused
on price reduction and on-time delivery. On the other hand, tomorrow’s supply
chain will be strategically coupled and value driven. It will have to deal with more
complexity and issues and be able to adapt to rapidly changing conditions and
situations (Melnyk et al. 2011).
• Individual supply chains are becoming more complex. In addition, companies
must build multiple supply chains because of differences among products, cus-
tomers, suppliers, geographic locations, economic cycles, political actions or inac-
tions, and other confounding occurrences. In speaking of this complexity, one
paper poses the question, “Should we give up now?” The authors respond, “None
of this is to say that the supply chain world is too complex to effectively plan and
execute. Our professional challenge is to do just that, and it is a large part of what
makes our professional lives more rewarding than most” (Van Bodegraven and
Ackerman 2013).
• Another study sponsored by CAPS Research, the research arm of the ISM, also
identified competitive pressures as having a strong and direct effect on supply
chain strategy and integration. The study focused on two key issues—alignment
and linkage—both inside an organization and across organizations. The study
concluded that well-integrated supply chains are not ubiquitous at this time.
While there are success stories of excellent supply chain integration, there are also
many cases of failures. The authors identified 14 challenges that organizations
must overcome to achieve true supply chain integration. They conclude that good
strategies and practices originating with leading companies will provide guidance
for companies to follow in pursuing supply chain integration (Carter et al. 2009).
• Another study found that leading companies in SCM consider three capabilities
that are essential to supply chain success today—visibility, analytics, and flex-
ibility. Supply chain leaders are building systems and developing partnerships
that give them greater visibility into a wider set of factors. To take advantage of
this visibility, they have to be able to analyze the vast amount of data collected.
- 370 Principles of Supply Chain Management
Finally, they must possess the flexibility to take advantage of their increased
knowledge. The study found that firms with these capabilities are outperforming
their rivals in many dimensions, notably in growth and profit (CSC 2012).
• Some writers are pointing out that it may be too simplistic to think of supply
chains as linear; they should be thought of as a network or web of interconnected
entities with built-in redundancy and resiliency to confront today’s rapidly chang-
ing business environment. This type of network could also mediate risks and
encourage longer lasting relationships (Siegfried 2013).
The gap between reality and goals does not mean supply chains are not a good idea, but
it does indicate that building an effective supply chain is not easy and takes time. What
factors make it so difficult?
Supply chains are complex. Consider that each company in the supply chain has its own
set of customers that are unique from other companies in the supply chain. Now consider
that each company offers its own set of products, different from other companies in the
supply chain. The result is a maze of supplier/product/customer combinations. Even in
a small company, the supply chain is complex; in a large company, it is overwhelming. A
study by Deloitte Touche Tohmatsu describes the complexity paradoxes of optimization,
customer collaboration, innovation, flexibility, and risk (Deloitte 2003).
If the inherent complexity described earlier were not enough, most companies are mak-
ing the relationships even more complex by outsourcing both the manufacturing of goods
and the providing of services. Outsourcing is here to stay and assimilating it into every-
day practice is a challenge for even the most experienced global participant. Competition
is increasing; this means every business has to continually improve its performance. The
supply chain that was innovative just a few years ago is barely adequate today. Variability
is rampant along the supply chain. Not only are the relationships complex, they are con-
stantly changing, and change breeds variability. It is difficult enough to build interper-
sonal relationships among individuals and even more difficult for companies to build
interorganizational relationships with their supply chain partners. It is difficult and takes
time, longer than many managers have the patience to devote.
Another major element of change is the introduction of e-commerce in the equation.
That is another whole subject, but the impact on supply chains is indisputable. Companies
cannot use identical supply chains for their e-commerce efforts as they do for their
regular products.
Supply chains, as a management concept, are becoming more comprehensive. What
started as a transactional process is rapidly becoming a strategic process. What started in
the purchasing department is becoming a cross-functional, horizontal flow process that
includes all of the functions of a business.
Research in Support of Integration Efforts
While leading companies have developed effective supply chains, some businesses are
still in the early stages of supply chain development. However, the gap is getting wider
between those companies that are successful at implementation versus those that are not
(Beth et al. 2003). Whether or not to have an effective and efficient supply chain is no longer
an option, it is an imperative!
Several sources provide direction and encouragement. The consulting group, PRTM,
describes the transformation required to move from a functionally focused supply chain
to the more desired cross-enterprise collaboration supply chain. The stages begin with a
- The Need to Integrate 371
(1) functional focus and proceed to an (2) internal integration, then to an (3) external inte-
gration, and finally to (4) cross-enterprise collaboration (PRTM 2005). Cigolini and col-
leagues offer a similar progression from (1) traditional logistics, with a focus on reducing
inventory; to (2) modern logistics, with a shift from cost reduction to improving customer
service; to (3) integrated process redesign, which provides a systemic vision of the supply
chain; to (4) an industrial organization, which focuses on the strategic alliances among
the various members of the same supply chain (Cigolini et al. 2004). Others describe the
need for logistics synchronization, information sharing, incentive alignment, and collec-
tive learning necessary for an integrated supply chain. There are plenty of answers; it is
just that none of them is easy.
Some see a brighter future for effective implementation, if managers are willing to work
for it. Kempainen and Vepsalainen emphasized, “Information sharing and coordina-
tion are often considered the preconditions for successful supply chains. Our analysis of
supply chain practices in industrial supply chains shows that visibility is still limited”
(Kempainen and Vepsalainen 2003).
A survey of APICS members found that information sharing was not among the top
criteria used by companies in selecting suppliers; yet, information sharing was one of the
major positive influences on firm performance, in such areas as market share, return on
assets (ROA), product quality, and competitive position. Not surprisingly, they suggest
increased attention to effective information sharing (Kannan and Tan 2003).
In the interest of promoting improved coordination, there are advantages in loosely cou-
pled supply chains. Tightly coupled supply chains exist when partners closely connect in
a one-to-one relationship, such as through traditional electronic data interchange (EDI).
In contrast, “a loosely coupled supply chain is an extensively integrated but loosely con-
nected supply chain network. These concepts have emerged from the Web services, Web
portal and Extended Mark-up Language (XML) technologies” (Wong et al. 2004). A loosely
coupled supply chain has a specific niche for short- and medium-term buyer–seller rela-
tionships, SMEs, and secondary partners and for a large number of partners.
Charles Poirier and Frank Quinn also offer cautious optimism. In reporting the results
of a survey, they comment, “The findings further suggest that those running the business
today continue to think of SCM as a short-term cost-reduction effort, not worthy of strate-
gic importance. Only 37% of the companies indicated their supply chain initiatives were
‘mostly’ or ‘fully’ aligned with corporate strategy. The survey results indicate that collabo-
ration across an extended enterprise is still more theory than practice. Collaboration was
the single most pressing need—both internal collaboration and external collaboration with
suppliers and customers. Perhaps the most important insight from our survey is that the
real business benefit of advanced SCM remains largely untapped” (Poirier and Quinn 2006).
Consider this scenario. Companies report that developing reliable demand forecasts is
one of their major challenges. In order to make better forecasts, a company needs more
information from downstream members of the supply chain, and the company needs to
collaborate with downstream customers and upstream suppliers, in order to develop a
mutually beneficial demand forecast. To obtain better information, partners need effec-
tive interorganizational communications. Improved communications involves more than
technology. Not only do they need to have a better way to communicate, such as through
electronic interorganizational systems (IOS), but they also need to agree on what informa-
tion to communicate. Here, it gets tricky.
It is at this point that the element of trust becomes important. Unfortunately, trust has
been largely lacking in many supply chains. Most of those who have studied trust, and
the list goes well beyond business researchers to include those in organizational science,
- 372 Principles of Supply Chain Management
industrial psychology, economics, and operations research, have found it a difficult ingre-
dient to integrate into working relationships (Handfield and Bechtel 2004). Much of the
research concludes that in order to trust someone or some entity, the parties involved have
to work with each other to verify that the benefits of trust truly outweigh the risks. At some
point, companies have to make a judgment decision to trigger the cycle from trust to col-
laboration, to better demand forecasts, to improved execution, to increased profits along
the supply chain.
Business success involves recognition of the need to move to an integrated supply chain.
It is a major decision for a company and requires top management support and participa-
tion because it requires major expenditures and commitment of resources, especially of
key management employees. At present, few companies have moved to a completely inte-
grated supply chain. To accomplish the change, management will need to cope with four
separate, yet related, paradigm shifts:
• From mass production to mass customization
• From vertical integration to virtual integration
• From homogeneous cultures to diverse cultures
• From bottom line to triple bottom line (TBL)
Each of these transitions takes time and dedication on the part of the companies involved.
In Chapter 7, we described how companies were moving from a batch flow process to a
lean flow process. In making this transition, they are able to reduce the amount of inven-
tory they carry, especially the work-in-process inventory. When they reduce inventory,
they reduce the response time to customers. However, most companies cannot make the
transition to a lean supply chain unless other members of the supply chain also incorpo-
rate lean production techniques in their operations.
From Mass Production to Mass Customization
For over a century, mass production has been the dominant theme in manufacturing, not
only in the United States but also throughout the industrialized world. Mass production
aimed to produce high volumes of relatively standard products and make them available
to consumers within a reasonable lead time. The emphasis was on cost and quality, not
variety, so it was possible to make a limited number of products using a make-to-stock
(MTS) approach.
From Craft to Mass Production
Up until about 1840, most products were produced by small, family-owned businesses.
Products were customized to meet the needs of individual consumers. The critical success
factors for producers were function and availability. Several factors limited the growth
and scope of businesses. The lack of distribution capability made it difficult for companies
to sell their products very far from their home location—they just could not move products
over great distances because the predominant way to ship goods was horse-drawn wag-
ons or small canal boats.
- The Need to Integrate 373
The invention of the steam engine at the beginning of the industrial revolution to power
train locomotives heralded the beginning of a new age in manufacturing. Companies could
now expand their market area. This meant increased sales and the need for increased man-
ufacturing capability. In order to produce in greater volumes, manufacturing companies
had to develop new methods of making their products. The major driver of this transition
was standardization, which began with the concept of interchangeable parts. One of the
more publicized efforts in this direction was the work by Eli Whitney to make muskets for
the government that featured using interchangeable parts. Although Whitney’s work was
only partially successful, it did represent the beginnings of work to make interchangeable
parts a standard component of the manufacturing process (Hounshell 1984).
Companies found that to make interchangeable parts, they had to carefully control the
process of making those parts. This led to the standardization of manufacturing processes.
Tooling, equipment setups, and raw materials were items that needed to be standardized,
so the manufacturing processes could produce consistent parts with acceptable quality.
While equipment was an important part of the movement to mass production, work-
ers played an equally important role. Just as with products and processes, workers had
to be standardized, in order to mass produce standard products. Usually, this meant
dividing the job into small tasks for each worker, a concept known as job specialization.
Workers could learn to perform small increments of work quickly and achieve high levels
of productivity.
As companies made progress in standardizing materials, processes, and workers, they
also began to develop more consistent and higher-speed equipment. In the United States,
there was a labor shortage and equipment was developed to replace the need for work-
ers. The movement to higher speed was aided by advances in methods of transmitting
power to these machines. Electric power eventually replaced steam power, a revolutionary
improvement.
Beginning in the later part of the nineteenth century, Frederick W. Taylor combined all of
these standardizing elements into a concept that became known as scientific management.
The principles of scientific management were easily understood, although not always pop-
ular among traditionalists. The age of mass production had fully arrived (Stevenson 2007).
In Chapter 7, we described various strategies by which companies provide products to
customers. These stages include MTS, assemble-to-order (ATO), make-to-order (MTO),
and engineer-to-order (ETO). Standard products are made in anticipation of a sale and
stocked in a location easily accessible to the customer, such as a retail store, to reduce the
response time to the customer. As the amount of customization required increases, it is
being achieved by using ATO, MTO, or ETO methods. This satisfies the desire for custom-
ization but increases the response time to the customer.
Mass production has been a successful way to produce goods for mass markets, where
the emphasis has been on low costs and high quality. However, it sacrifices the capability
to produce customized products for small markets.
Prelude to Mass Customization
Beginning in the last quarter of the twentieth century, the manufacturing capability of
the global industrial world caught up with the demand of mass markets. As companies
looked for new ways to compete, it was given that everyone had low costs and high qual-
ity. In order to differentiate themselves from their competitors, manufacturers began to
offer a greater variety of products. While this movement was most apparent in consumer
products, it also emerged, to some extent, in industrial products. Appliance manufacturers
- 374 Principles of Supply Chain Management
offered greater variety to consumers, and integrated circuit manufacturers also offered
greater variety to assemblers of electronic products.
Changing customer preferences also contributed to the need for greater variety. In order
to capture their own personality and tastes, affluent individuals began to search for some-
thing different in the way of products and services.
In order to more effectively compete, manufacturers began to push their greater v ariety
of products out to the consumer. On the other side, consumers wanting greater vari-
ety began to pull those products from the manufacturers. The age of mass customization
emerged as businesses began to decide how best to operate in the changing environment.
Joseph Pine ushered in the age of mass customization with his book by the same name
(Pine 1993).
One approach to providing increased choices to consumers is to manufacture a greater
variety of products using the traditional MTS approach. However, increased variety can
quickly add complexity and costs to production planning and inventory management.
Companies found there were limits to the number of products they can profitably support
in an MTS environment. Responding to the demands for faster response times and greater
variety necessitated a different approach.
The transition from mass production to mass customization requires radical changes in
products, processes, employees, and equipment. One of the key changes is in the design
of products. Building on the interchangeable parts idea from mass production, mass cus-
tomization requires that products include combining interchangeable parts into modular
subassemblies that can be quickly customized to meet a customer’s requirements. This
approach is an adaptation of the ATO process.
The need for product flexibility triggered the movement to make processes more flexible.
Manufacturers did not want to lose the high productivity and quality the mass production
approach offered. However, changes were needed to find ways to make their processes
more flexible. One obvious improvement was to reduce setup times when manufactur-
ing changes from one product to another. Under mass production, the emphasis was on
long runs and setup times were insignificant. If a line could run 80 hours before a change
to another product, then 4 hours to set up the equipment was not a problem. However,
as product variety increased, run times decreased and a 4-hour setup for an 8-hour run
became a problem. With careful analysis, companies found that they could reduce setup
times from hours to minutes. Toyota’s work in reducing setup times became known as the
single minute exchange of dies (SMED) system to convey the idea that setup times had to
be drastically reduced (Shingo 1985).
Employees also had to change. Where job specialization was the accepted approach
under mass production, job enlargement became the preferred approach for mass cus-
tomization. Job enlargement was emerging in progressive companies even before mass
customization because of the need to reduce job boredom and monotony that led to high
employee turnover. Because employees can think (unlike machines), they can adapt to
changing conditions and, hence, are more flexible than machines. Under mass production,
many companies tried to automate their processes to eliminate the need for workers. The
lights out factory was the ultimate goal, where the plant would be completely automatic
and few workers would be required. As companies moved toward mass customization,
they realized production-level employees who could think and make decisions would be
a natural complement to add versatility to high-speed equipment.
Even with the changes in machine setups and employee capabilities, equipment design-
ers also tried to add more flexibility and versatility to the equipment through computer
programming. Computer-numeric-controlled (CNC) equipment became commonplace.
- The Need to Integrate 375
TABLE 11.3
Examples of Movement toward Mass Customization
Industry Approaches to Mass Customization
Automobiles Deliver a customized car in 3 days
Information software PC software that can be customized by the user
Telecommunications Cell phone apps to fit customer needs
Personal care products Match makeup to individual customer
Beverage industries Provide a wide variety of beverages
Breakfast cereals Provide a wide variety of breakfast cereals
Clothes Custom fit clothes
Insurance Variety of group insurance plans
Banking Variety of bill payment plans
The scientific management approach facilitated improvements in mass production.
The systems management approach is driving the movement to mass customization.
By definition, a systems approach implies that different activities, often involving differ-
ent entities, have to be linked together to create a smooth functioning result.
Numerous industries illustrate movement toward mass customization. Table 11.3 lists
some of these ventures. While mass customization is far from replacing mass production,
it is making inroads.
The manufacturing strategies of MTS, ATO, MTO, and ETO can be adapted from a
mass production perspective to a mass customization perspective. Businesses continue
to search for ways to produce high volumes of customized products with significantly
decreased lead times.
From Vertical Integration to Virtual Integration
The eminent business historian, Alfred Chandler, Jr., provided a detailed explanation of
business organizations from the early eighteenth century until late in the twentieth cen-
tury (Chandler 1977). The progression was from small owner-managed local businesses,
to large professionally managed global businesses that were often tightly vertically inte-
grated, to today’s large loosely connected supply chains.
The owner usually managed these early businesses. An individual would start a com-
pany and continue to run it over his or her lifetime and then pass the ownership and man-
agement to the children. This was the dominant form of organization in the United States
until about midway in the nineteenth century.
During the Industrial Revolution, companies grew larger and new forms of organiza-
tions began to appear. The railroads and oil companies grew rapidly and needed to move
toward a group ownership format, as opposed to an individual ownership arrangement.
Not surprisingly, these businesses were too large to continue under the old owner-managed
practices. While owners were often active in the business, they moved to top management
decision making, such as overseeing the allocation of resources, while day-to-day opera-
tions became the responsibility of professional managers. Even so, both managers and
owners were more concerned with short-term decisions than long-term, or strategic, deci-
sions. The line-and-staff form of organization began to appear.
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From the 1880s until World War I, a number of industries blossomed and saw the growth of
large companies—U.S. Rubber in rubber products, General Electric in manufactured goods,
and DuPont in explosives and chemicals. Companies found there were two areas necessary
in their efforts to expand their sales: (1) a production system that connected the flow of mate-
rials and the processes into a continuous stream and (2) an in-house marketing organiza-
tion that could sell the product into increasingly larger and more remote markets (Chandler
1977). Ford’s focus on the assembly line for automobiles represented the most progressive
movement toward product flow. Whereas companies had used jobbers and agents to sell
their products earlier, they found that having their own sales and marketing organizations
increased their ability to direct and control those efforts. The line-and-staff form of organiza-
tion became popular to the extent that almost all larger companies, such as General Electric
and DuPont, used it in some form. Companies also decided that vertical integration was the
most effective way to organize in terms of securing resources and retailing their products.
From World War I to World War II, organizations became more formal and professional
managers almost completely took over the day-to-day management of the companies.
Owners may have still managed the smaller organizations, but the large public corpo-
rations used professional management. Long-range planning—the forerunner of strate-
gic planning—appeared, but was still not a well-entrenched practice in most companies.
Companies began to refine their accounting practices, and DuPont introduced a way
of combining profitability with asset utilization in their return on investment model.
They used the following equation to look at both elements:
Return on Investment (ROI) = (Income/Investment) = (Income/Sales) × (Sales/Investment)
The first part of the equation measures profitability, or percent income on sales, and the
second part measures asset turnover. For internal performance measurement, the ROI can
be changed to ROA.
Following World War II, the United States was the only major industrial country whose
manufacturing capability remained intact. Much of the manufacturing capacity in Europe
and Japan was destroyed by bombing during the war. At the time, the rest of Asia did not
possess much manufacturing capability. However, Europe and Japan rebuilt quickly, with
the latest technologies, and, by the 1960s, were looking to enter the U.S. market. While they
had some initial difficulties with automobiles, Japan quickly became a major player in the
consumer electronics industries. Meanwhile, U.S. companies had plenty of capacity and
operations managers found it difficult to convince their company financial executives on
the need to invest in newer technology. Consequently, American manufacturers in basic
industries, such as steel, found they were beginning to lose market share.
During the 1960s and 1970s, U.S. companies became fascinated with growth through
acquisitions. Teledyne and IT&T became the darlings of the investment community with
their ability to add seemingly disparate companies through stock acquisitions and increase
the stock value of the acquiring company more than the absolute value of the acquired
company. Synergy became the CEO’s mantra. As a result of combining dissimilar busi-
nesses, different organizational forms appeared. One of the more popular forms was the
matrix organization, an attempt to assemble a variety of functional representatives into a
functioning project organization.
By the 1980s, it became apparent that foreign competition was taking large segments of
the U.S. market. Companies were also finding the conglomerates they had created through
acquisitions were not necessarily that profitable. As a result, many companies began to
divest those businesses that did not fit well with the mission of the organization.
- The Need to Integrate 377
Improvements in production as well as services were required, and the 1980s saw the
rise of a number of management programs designed to provide those improvements,
including just in time (JIT) followed by lean production, total quality management (TQM)
followed by Six Sigma, and EDI followed by Internet EDI. In addition, the organizational
structure was changing as new flatter forms were used to reduce the slow decision-making
process inherent in the tall, line-and-staff hierarchical organizations.
Another organizational form that developed was an extension of the project, or matrix,
structure. This structure, the virtual organization, involves “short-term alliances between
independent organizations in a potentially long-term relationship to design, produce, and
distribute a product. Organizations cooperate based on mutual values and act as a single
entity to third parties” (Blackstone 2013). Boeing used this type of organization for their
latest model airplane, the 787 Dreamliner (Crown and Epstein 2008).
In the last century, businesses have moved from a tightly coupled vertically integrated
form of organization to a loosely coupled virtual organization form. Vertical integration
provided direct control over the processes and afforded businesses the opportunity to
grow to large sizes with relatively standard products and services. The virtual integration
approach enables businesses to change their product lines as market demands rapidly
change. Consequently, as businesses move from mass production to mass customization,
they must change their organizational structures to fit with their new strategies.
From Homogeneous Cultures to Diverse Cultures
When businesses were smaller and confined to local or regional market areas, they prided
themselves on having stable work forces where it was not unusual for employees to spend
their entire career with one company. During his tenure as a division manager of a man-
ufacturing operation in a small Midwestern community, one of the authors recalls that
the work force included three generations from some families. Low labor turnover was
a desirable objective. The culture of this business was well entrenched and somewhat
predictable.
Today, it is rare that multiple generations work in the same company. Mobility among
employees is accepted and necessary during this period of product proliferation, offshore
outsourcing, and accelerated technology development. Younger members of the work
force must be prepared to consider movement a way of life, in jobs, careers, companies, and
locations. Consequently, organizational cultures are more diverse and less predictable.
The diversity of cultures makes it imperative that businesses learn to become members
of integrated supply chains. Integration, in this case, implies that diverse entities work
together effectively and that these entities will themselves be diverse.
From Bottom Line to Triple Bottom Line
There is another form of supply chain integration that is receiving an increasing amount
of attention—the integration of environmental and social concerns. Just as outsourcing
is exposing the risks of disruptions in supply chains, it is also focusing attention on poor
- 378 Principles of Supply Chain Management
working conditions among supplier organizations (a building collapse in Bangladesh that
kills hundreds of workers) and environmental disasters arising from oil spills or train or
truck wrecks as goods are transported to their destinations.
What can an organization do to achieve this integration? Over a decade ago, John
Elkington (1998) suggested an approach he called the triple bottom line (TBL), a term that
has gathered support over the years. Elkington proposed that businesses should aim for
success in three areas: economic, societal, and environmental. He recognized it takes all
three to achieve sustainability.
Sustainability is another term that deserves some explanation. Sustainability, for a busi-
ness, is the ability to keep operating successfully. The Brundtland Commission report, Our
Common Future, defined sustainable development as “development that meets the need of
the present world without compromising the ability of the future generations to meet their
own needs” (Anderson 2006).
As the TBL concept implies, the mission of business is to make a profit. That mandate
has long been a given in the management literature and in the management of companies.
Efforts to introduce social and environmental concerns were often viewed as obstacles, or
at least distractions, by executives, especially at the highest levels. Just as victories count in
measuring a coach’s performance in football, profits were the measure of executive perfor-
mance. Economic performance is a tangible, short-term game in which only the strong can
survive. This is the first bottom line.
Social issues, such as providing employees with suitable working conditions, fair wages,
and a host of other matters, were topics to be debated with unions during contract negotia-
tions. Other matters, such as increased traffic flows, noise, and tax relief, were to be con-
sidered as the necessary evils of bringing jobs into a community. Lead-laden toys, polluted
milk, and side effects of drugs were too often considered the unfortunate consequences
of the drive for business continuity. Companies often used human resource or public rela-
tions departments as buffers against the barrage of new social agendas. Achieving social
responsibility is difficult to measure, report, and set goals for, although a number of com-
panies are beginning to come to grips with the need to report their activities in this area.
However, it has been difficult for many businesses to resolve their obligations in the soci-
etal arena, the second bottom line.
Environmental issues have moved through a transition. Protecting the environment
was originally viewed by most businesses as simply a need to comply with government
regulations. Saving endangered species and trying to assess the effects of global warming
was for special interest groups and the government, not business. As businesses began to
reluctantly comply with mandates to reduce polluted discharge water or exhaust gases,
or to substitute benign for hazardous materials, or to reduce the waste going into land-
fills, they made an astounding discovery—the changes could actually save them money!
Companies began to associate doing good—environmental improvement projects—with
doing well or making a profit (Laszlo 2008). A separate, and important, topic is the role of
reverse logistics and its contribution to improved resource utilization as we described in
Chapter 10. Environmental projects can be planned and measured; they are often multi-
year, and they represent the third bottom line.
In a follow-up to his 2008 book, Chris Laszlo, along with coauthor Nadya
Zhexembayeva, emphasizes the need for an integrated approach in business to the eco-
nomic, social, and environmental issues. In speaking of the widespread coverage of
social and ecological topics, the authors conclude, “With topics ranging from CO2 emis-
sions, water rights, and deforestation to child labor, peace, and social equity, the needs
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